By Jeffrey Cohen, Investment Advisor Representative & Management Consultant
US Advanced Computing Infrastructure, Inc.
So much to discuss this morning in US financial markets.
Inflation news was very positive. Not only was consumer inflation down (CPI-U) but so was producer price inflation (PPI). This gives the government a little breathing room. We noticed quantitative tightening is having the first $100B in impacts, and the interest rate hikes are of course positive in helping fight inflation. On the other side, we see the dollar weakening, which helps raise inflation in USD. Finally, where is inflation in China and Japan? More like 2% to 3%, nothing like NATO is suffering.
Markets are not up this year. Despite reports to the contrary, all three major US equity exchanges are lower this year, even accounting for dividends. We are merely rising within the fall.
Our model picked two dividend stocks. These stocks scored better than the SPY (S&P 500 Index ETF), and paid higher dividends last year than the SPY. This is not usual, the model was bearish in the extreme until recently.
The variance of the S&P 500 remains elevated while the variance of individual stocks seems to have peaked and is down slightly. This reinforces our notion or hypothesis that the S&P 500 is a point of leverage and manipulation of the market. Big bets are made in the SPY or ES_F, and these cascade through the market. The market for individual stocks is moving more slowly, and could be indicating an end to some of the destructive volatility we have seen. It is still very early, but call this an early warning. Volatility in the stocks of money making and money losing companies may have peaked this week.
With a reduced and modest 8% expected return on stocks, our model is quite bullish. Eleven (11) stocks scored better than the SPY for risk-return trade-off. For the longest time (weeks) there were none. The CQNS UP run model likes stocks in the following sub-sectors (not the sub-sectors, but a few stocks in them):
Large-cap tech stocks
Software & eCommerce
Our CQNS Down Run sees many of the same faces, but also a few new names. Some of these are old MEME stocks. Some just act like it. High volatility and no sense of direction. I guess these are good to sell options on. All hat and no cowboy. All smoke and no fire. Big, dramatic moves that don't seem to go anywhere, or circle the drain of a price of zero.
There are more stocks to invest in. I remember when we started running and publishing results in our model there were 3,100 stocks that passed data validation. That number is up around 20%, and that discounts foreign HQ/located companies that we pull out of our CQNS UP run.
VIX is down, below 20 this morning in pre-market trading. This suggests downside insurance against stock price declines is less costly than before. Insurance against stock price declines in the US is cheaper than before. What's funny is that stock prices are higher...but insurance against falls is lower. You would think intuitively that it would go the other way. Try this one on for size. As the variance of SPY stock price moves increases (showing larger, more asymptotic moves), the VIX or price of insurance against those moves decreases. This is an anomalous relationship and could indicate poor prices before, or a disturbance in the force currently.
Both stocks and bonds are up over the past few days, although corporate fixed income is lower for those companies that already have lower-price bonds. It looks like the market is punishing high-risk companies (companies at risk of repaying their debts). We would need more hard evidence, but we can see this anecdotally in FINRA-Morningstar data and in the WSJ Bond Benchmarks. According to the WSJ, corporate bonds in junk status (rated CCC) yields rose from 7% earlier this year to 13.1% currently. They were even higher, with an average of 15.2%. More to come on how to quantify this, but it looks like some corporate debt is firming, while others weaken.
The US Dollar is down HARD since the news on consumer inflation, which likely reflects the lower expectation of future short-term or policy interest rate hikes.
Energy prices are rising, and economic metals are up today (and over the past few days/weeks). This may suggest the recession is ending.
We found some really bad news in the Inflation Reduction Act that the Senate passed on a 100% Democrat vote (51-50) with VP Kamala Harris casting the deciding vote. Read Section 10101. Corporate Alternative Minimum Tax and shoot me a note. I spoke about this in the video as I found the appropriate and relevant tax in the bill. Boom, this could knock a few percentage points off the S&P 500 if it passes in its current form. This is one reason to be bearish into the Fall.
We did due diligence on Hallador Energy Corporation $HNRG. They have liquidity issues and recently raised money from company insiders (convertible unsecured debt paying 8%) where most of it was converted into equity almost immediately. That money, around $20M, is needed for capital projects for the rest of $2022. Good luck to this company. Their mines are showing safety violation allegations in their latest 10-Q filing with the SEC, and they recently had a mine fatality. His name was Brian Rodriguez and he was a US Marine who served two combat tours in Iraq. Let's hope they use the money to keep their mines safe and prevent future accidents. Document here.
We notice that moves higher in this market are happening in the morning, and very quickly. If you blink, sometimes you can miss the move higher. Pre-market moves without follow-through during the day. Interesting, as we saw this in previous markets.